Often a minority shareholder will seek to sue for a business divorce because they believe their business partner is stealing from them. But there are many things your business partner could be doing that could potentially harm the company short of stealing money from it – including making horrible business decisions and mismanagement of the company.
What if your partner is, in fact, not stealing but simply mismanaging the company? You may have no legal power to stop them because they are the majority owner. Even if you are 50/50 owners, it still may be the case that you have no practical ability to prevent bad decisions. But bad business decisions can harm the company every bit as much as embezzlement, possibly even more.
In one such case, the client knew that their PPP loan was not being used as intended, so he assumed the money was being pocketed. As it turned out, the majority owner simply did not know what he was doing and used the loan proceeds in a way that would make them ineligible for loan forgiveness. To make matters worse, when applying for loan forgiveness, he lied about how the funds were used. The monies did not go into the majority shareholder’s pocket, but the damage he caused was almost as bad.
Such mismanagement could be anything. In one case, the partner in charge of the company was absolutely incapable of making payroll on time. In another, she fired all the key employees out of jealousy and then was unable to find adequate replacements. In multiple other cases, I have seen majority owners blatantly refuse to listen to advice from professionals, including the company lawyer and accountant. Why hire professionals and pay them only to repeatedly ignore their advice?
Oppression in New Jersey
In New Jersey, the shareholder oppression statute specifically mentions the word “mismanagement” as being actionable. But courts do not want to micro-manage businesses, and the business judgment rule does give protection to business decisions – up to a point. But if the mismanagement is bad enough, a court of equity likely will not want to leave you stuck in the company, at the whim of someone who either does not know what they are doing or has an agenda that harms the company.
As with any decision to file suit against your business partner, you must weigh the costs and benefits of suing due to mismanagement. One stupid business decision is not going to give rise to a case worth pursuing. But if the mismanagement accumulates until it threatens the well-being of the company – and your investment – business divorce litigation may be your only viable way out.